Business Directories

Saudi Arabia 'faces oil, fiscal challenges'

Riyadh, July 21, 2011

The sharp rise in Saudi Arabia’s domestic oil consumption and the increasing government spending pose huge challenges for the kingdom’s economy, says a report.

There is widespread understanding that with oil prices around $100 per barrel, Saudi Arabia’s oil wealth is providing vast revenue inflows, enabling a strong fiscal position with low government debt and high government savings, said Jadwa Investment, a leading Saudi investment bank, in a study on the Saudi oil sector.

This wealth is particularly timely as the government has increased spending and cash transfers to Saudi citizens in the wake of the broader “Arab Spring”, it said.

For the near term, Saudi Arabia is likely to continue to receive oil revenues in excess of its spending needs, with the oil price needed to balance the budget currently about $20 per barrel below the actual price, the study said.

Not widely realised, however, is that three major trends, if continued on their current and most likely paths, portend a much more difficult energy and revenue future for the kingdom, it said. They are:

* The kingdom’s domestic consumption of oil (and gas) is rising very sharply, reducing the amount of oil available for export. Low domestic prices -- oil is sold in Saudi Arabia at between 3 per cent and 20 per cent of the global price -- mean the efficiency of oil use is worsening. Consumption is growing at about twice the rate of non-oil GDP growth.

* Saudi government spending is likely to continue rising at an annual pace of 7 per cent or more, with ongoing reliance on oil revenues as the primary revenue source.

* Saudi oil output has not risen significantly in 30 years, and in our view is unlikely to rise on a sustained basis over the next decade or more.

The combination of these trends would leave only sustained sharp rises in oil prices to meet fiscal needs. "While we think prices will continue to rise, we do not think they will rise at the rate required to meet the 'breakeven' price for the budget. Indeed, a decade-long plateau in oil prices, as the market has previously experienced, would likely lead to a rapid deterioration of the kingdom’s future fiscal position," it said.

Today the world consumes approximately 88 million barrels per day (mbpd) of oil. Of this, Saudi Arabia produces around 9 mbpd and Opec provides a total of 29 mbpd (33 per cent of total world consumption). Global consumption grows at about half the pace of global GDP growth, or typically 1.5 to 2.0 per cent per year.

With the global economy still emerging from recession the International Energy Agency (IEA) forecasts that global oil demand will grow by an average of 1.3 per cent per year for the next five years, equivalent to 1.1 mbpd of oil per year.

Behind these broad numbers several powerful trends are apparent in global oil consumption. First, oil has largely conceded the market for electricity production to natural gas, coal, and nuclear. Second, there is a clear shift in the growth in oil demand from West to East. Over the past 20 years, Saudi exports to Asia have grown from one-third to two-thirds of total crude oil exports. This trend is likely to continue, due to both the high growth in consumption and Asia’s commitment to oil-based transportation in the future, the report said.

The global oil resource base is abundant at almost 9 trillion barrels of conventional and non-conventional crude oil (such as extra heavy crude oil, shale oil and tar sands), according to the US Geological Survey.

These various types of oil become economically recoverable under various oil price scenarios, but basically, at sustained prices of over $80 per barrel, many of the unconventional sources can be, and currently are, profitably produced. At current global output of 88 mbpd, 9 trillion barrels of oil would represent about 280 years of supply.

Saudi Arabia has supplied a surprisingly stable percentage of total global oil output over the past 50 years, averaging around 10 per cent. During the oil market gyrations of the 1970s and 1980s, when disruptions and price spikes were frequent, Saudi output ranged from 16 per cent of the world total in 1980 (offsetting lost Iranian oil during the Iranian revolution), to 6 per cent in 1985 when Saudi Arabia, as Opec’s “swing producer”, swung production to as low as 2 mbpd.

Over the last 20 years, Saudi Arabia has experienced a fairly steady decline in its share of total global oil output from 12 per cent in 1991 to 10 per cent today.

Oil analysts have for many years forecast that the world would require more Saudi oil output in the future than has actually ever been the case. New oil discoveries, technology, increasing efficiency of oil use, geopolitical events and changing oil policies all have contributed to lower actual need for Saudi oil than thought previously, it said.

The tendency has been to overestimate the global demand for oil, underestimate the growth in supplies outside the Middle East, then assume that Saudi Arabia, with its vast oil reserves of over 260 billion barrels, would fill a growing gap that actually never materialises.

A most likely scenario is that the actual trend of stable to gradually declining Saudi share of global oil output will continue. By 2030, if global oil production has grown by 1.4 per cent per year and Saudi Arabia continues to capture about 10 per cent of global market share, then the kingdom’s output would be around 11.5 mbpd, versus today’s 9+ mbpd. This is not a significant change and still well within Saudi Arabia’s existing crude oil production capacity of 12.5 mbpd, it said. - TradeArabia News Service